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London Quick Take - 3 July - FTSE 100 at 4-month high and Dax, Dow hit all-time highs as markets trim rate hike bets after US jobs report
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
So-called ‘breakeven’ employment growth is the number of jobs that must be added to the economy each month to keep unemployment steady while still absorbing the growth in the potential labour force.
The breakeven level has varied a lot over time, from 185,000 jobs a month in the 1970s as baby boomers and more women entered the labour force, to as low as 80,000 in the 2010s as population growth cooled and the boomers started retiring. The Covid pandemic caused the breakeven pace to fall just 50,000 jobs per month in late 2020.
Today it is even lower due to the collapse in immigration. According to a Fed, the breakeven pace in 2026 “could be significantly lower” than the historic low reached during the pandemic. “The breakeven pace could fall to nearly zero, requiring less than 10,000 new jobs per month in 2026,” the Fed says.
We're running at 100k or more on 3-month average, which is more than enough to beat the “near-zero” level being discussed here. Even the lowly 12-month average of 36k is above zero. So, it doesn't look to me like this data changes the fact the Fed is short one side of its mandate – inflation - and that suddenly it needs to be more mindful of the other side of its mandate – employment. July is still 'live' but the market is happy to see the cup running over.
Stocks are buoyant after a weaker-than-expected US jobs report eased concerns in the market that the Fed is about to raise interest rates, sending the Dow Jones industrial average to a record high Thursday. European markets hit fresh record highs with the DAX and Stoxx 600 at new all-time highs, while the FTSE 100 has jumped to a four-month high just a whisker from 10,700 as the mood turns more positive. Basically, you have what looks to be a more durable decline in oil prices back to pre-war levels and signals from Europe and the US that central banks are going to stay on the sidelines for longer. We've seen rotation out of the semiconductor leaders due to valuations, encouraging fresh leadership, and that kind of healthy market internal dynamic is going to be helped if the market doesn’t think the Fed is about to spoil the party. Meanwhile, Brent crude hit $70 yesterday, down 40% since the peak, where it’s found some support to move back towards $72 this morning. Gold has turned a corner, set to post its first weekly advance in five.
Although semiconductors fell for a second day on Thursday, pushing the Nasdaq down by 0.8% for the session, some fresh news from Anthropic about tapping Samsung Electronics for a custom AI chip helped lift sentiment overnight in Asia, where the Kospi rallied almost 6%. Wall Street is closed today for the 4 July holiday.
Odds of a hike by the Fed fell on the softer-than-expected US jobs report as nonfarm payrolls for June increased +57k or the month, below the roughly 110k-115k expected and below a downwardly-revised figure for May of 129k. And while the unemployment rate actually fell to 4.2%, its lowest in a year, that was largely down to a 0.3 percentage point fall in the participation rate, which outside of the Covid era is at a 50-year low.
Front-end yields declined sharply and the odds of the Fed hiking this month were cut in half from around 30% to 17%, while a 25bps increase in the fed funds rate in September is now just 50/50, according to the market. My hunch is the market is too quick to read the jobs report as ‘dovish’ for the reasons stated here before – the regime shift at the Fed is underappreciated and because breakeven employment ain’t what it used to be.
Although semiconductors fell for a second day on Thursday, pushing the Nasdaq down by 0.8% for the session, some fresh news from Anthropic about tapping Samsung Electronics for a custom AI chip helped lift sentiment overnight in Asia, where the Kospi rallied almost 6%. Wall Street is closed today for the 4 July holiday.
Odds of a hike by the Fed fell on the softer-than-expected US jobs report as nonfarm payrolls for June increased +57k or the month, below the roughly 110k-115k expected and below a downwardly-revised figure for May of 129k. And while the unemployment rate actually fell to 4.2%, its lowest in a year, that was largely down to a 0.3 percentage point fall in the participation rate, which outside of the Covid era is at a 50-year low.
Front-end yields declined sharply and the odds of the Fed hiking this month were cut in half from around 30% to 17%, while a 25bps increase in the fed funds rate in September is now just 50/50, according to the market. My hunch is the market is too quick to read the jobs report as ‘dovish’ for the reasons stated here before – the regime shift at the Fed is underappreciated and because breakeven employment ain’t what it used to be.
So-called ‘breakeven’ employment growth is the number of jobs that must be added to the economy each month to keep unemployment steady while still absorbing the growth in the potential labour force.
The breakeven level has varied a lot over time, from 185,000 jobs a month in the 1970s as baby boomers and more women entered the labour force, to as low as 80,000 in the 2010s as population growth cooled and the boomers started retiring. The Covid pandemic caused the breakeven pace to fall just 50,000 jobs per month in late 2020.
Today it is even lower due to the collapse in immigration. According to a Fed, the breakeven pace in 2026 “could be significantly lower” than the historic low reached during the pandemic. “The breakeven pace could fall to nearly zero, requiring less than 10,000 new jobs per month in 2026,” the Fed says.
Quoting directly from the Fed report -
“One important implication of a near-zero breakeven pace is that, even if the output of the U.S. economy (GDP) is growing at the same pace as potential output (potential GDP), employment growth in any given month is almost as likely to be negative as it is to be positive. Furthermore, these negative prints of job growth could be large in any given month ... [A] 90-percent confidence interval implies that it would not be unusual for there to be one or more months in 2026 with declines in total payroll employment as large as -100,000 jobs, even if economic output was growing at the rate of potential output growth.”
“One important implication of a near-zero breakeven pace is that, even if the output of the U.S. economy (GDP) is growing at the same pace as potential output (potential GDP), employment growth in any given month is almost as likely to be negative as it is to be positive. Furthermore, these negative prints of job growth could be large in any given month ... [A] 90-percent confidence interval implies that it would not be unusual for there to be one or more months in 2026 with declines in total payroll employment as large as -100,000 jobs, even if economic output was growing at the rate of potential output growth.”
We're running at 100k or more on 3-month average, which is more than enough to beat the “near-zero” level being discussed here. Even the lowly 12-month average of 36k is above zero. So, it doesn't look to me like this data changes the fact the Fed is short one side of its mandate – inflation - and that suddenly it needs to be more mindful of the other side of its mandate – employment. July is still 'live' but the market is happy to see the cup running over.
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